Fannie Sees High Redefaults in Its HSA Program

Washington-A loss mitigation approach that Fannie Mae pioneered turned out to have an extremely high redefault rate and now the company is scaling it back.

The government-sponsored enterprise launched the HomeSaver Advance program in February 2008 as a way to help homeowners catch on the mortgage payments and allow the mortgage giant to avoid the expense of purchasing nonperforming mortgage loans out of securitized pools.

Delinquent borrowers that had landed a new job or resolved other problems that got them into trouble could qualify for small personal loans of up to $15,000 to cover any arrearage. No payments are required on the unsecured loans for the first six months so homeowners could concentrate on resuming their regular monthly mortgage payments.

Federal Housing Finance Agency examiners discovered, however, that 70% of the borrowers had redefaulted on their first mortgage in the first 3,300 HomeSaver Advance transactions Fannie servicers completed in early 2008.

"Fannie Mae is de-emphasizing HomeSaver Advance and focusing attention on the Making Home Affordable modification program," a FHFA spokesperson said.

The FHFA told Congress the high redefault rate "calls into question the program's assumption that borrowers have the capacity to make payments going forward."

Fannie Mae said loan modifications have taken preference over the HomeSaver Advance program.

"Given the depth and scope of Making Home Affordable, we anticipate a decrease in HomeSaver Advance volumes," Fannie spokeswoman Amy Bonitatibus said.

Nevertheless, the GSE maintains that HomeSaver Advance loans "continue to be a viable foreclosure prevention solution for borrowers facing a temporary hardship."

FHFA data show that Fannie workouts involving loan modifications exceeded advances starting in January. HomeSaver was the preferred workout tool in the second half of 2008.

Fannie made 71,000 HomeSaver Advances in 2008 and another 20,400 advances in the first quarter with an average balance of $7,100.

Fannie's first-quarter financial reports show the mortgage giant had $516 million in HomeSaver Advances on its book as of March 31 after taking a $115 million charge-off.

The advances amortize over 14.5 years and have a 5% interest rate.

The quarterly report also notes that the program has a high redefault rate.

"Approximately 40% of the first-lien mortgage loans associated with HomeSaver Advances during the first nine months of 2008 were less than 60 days past due or had paid off as of six months following the funding date," Fannie said in the securities filing.